Buying into a declining market on speculation is a fools game. When I first studied stock trading, I noticed an important truth about picking tops and bottoms versus playing a trend; every attempt to pick a top or a bottom fails except the last one which is a big winner. Every attempt to trade momentum is a winner except the last one which is a big loser. It is better to hit many singles trading momentum than it is to try to hit home runs picking bottoms.

Many active buyers today are basing their decision on the belief that the market has bottomed, and they are betting on appreciation. They may be right, but I rather doubt it. It is much wiser safer to wait and see if positive price momentum can continue through the removal of government market props and the disposition of shadow inventory.

The state of the housing market has long reached a point where it's good news to hear, "It's not getting worse." Unfortunately, according to a firm that tracks borrowers behind on their mortgages, you can conclude at best, "It's getting worse, but less quickly."

Rising sales, largely spurred by first-time buyer credits, have given people hope that the beleaguered housing market has finally hit bottom and is even showing signs of life. It's been impossible, however, for me to get excited about this, considering that the number of people falling behind on their loan payments is growing, not shrinking. Unemployment continues to produce new delinquencies, and it's been many quarters now since we were talking only about subprime mortgages. No, delinquencies are hitting regular old fixed-rate mortgages to borrowers with good credit, too.

And here's the latest report from Lender Processing Services out of Jacksonville, Fla.: Delinquency rates have hit historic highs. More than 7.4 million home loans nationwide are in some stage of delinquency or foreclosure, with another 1 million properties either bank-owned or sold out of foreclosure. An incredible 10% of all U.S. loans are delinquent.

The worst-hit areas are the usual suspects: the boom-and-bust states of Florida, Nevada, Arizona, California, plus the economically savaged areas of Michigan and Ohio. Also up there are Mississippi, Georgia, Indiana and Illinois. But few states are escaping the problem; it's just that the worst states are so, so bad it makes the others look relatively good.

LPS says, "The pace of deterioration has slowed." That's the supposed good news. But I have a hard time thinking optimistically about this, not just because in January alone 346,000 borrowers fell behind on their payments for the first time. The other disturbing statistic is that older loans make up a higher percentage of new delinquencies — that means people who already had fallen behind and pulled themselves out of it (maybe through a loan modification program) are delinquent again. This confirms what many have said about the federal programs to reshape mortgages into loans people can actually pay: They're not doing the job for enough people.

The sheer number of bad loans surely means more foreclosures, which means more houses on the market being sold at bargain-basement prices. And that means we'll watch our property values continue going down, down, down.

Bulls are dismissive of shadow inventory as if it is just another argument bears make about house prices. Shadow inventory is a result of every expedient decision lenders made to avoid recognizing losses.

Every problem bears noted over the years — ARM loans, liar loans, negative amortization loans, artificially low interest rates, excessive speculation with 100% financing and so on — have all proven to be prescient. The predictable result of each of these problems is mortgage default followed by foreclosure which leads to more inventory and lower prices. Lenders have merely delayed this step-by-step process by refusing to foreclose. That doesn't make the problem go away; it just makes the problem worse. Appreciation from a strong economy is not coming, and even if it were, it wouldn't counteract the effect of so many distressed homeowners.

Lender Processing Services Chart Porn

Last week when I posted One Defaulting Owner’s Free Ride: Three Years and Counting, many wondered how common it was to find home debtors who have not made payments for a very long time. Take a careful look at the numbers in the chart below. According to LPS, there are almost a quarter million homeowners who have squatted for more than two years, and 33,723 of them have not begun the foreclosure process.

The shadow inventory and foreclosure problem is growing. For each property we resolve through the foreclosure process another two and one-half properties are defaulting.

If you had a virus, and if the medication you were taking to combat the disease were killing viruses at a slower rate than they reproduced, would you consider yourself healthy or improving?

Housing economist Dean Baker, the co-director of the Center for Economic and Policy Research, laid out his case at a risk conference last week for why we still have a housing bubble. Adjusted for inflation, home prices are still 15-20% higher than they were in the mid-1990s. “There’s no plausible fundamental explanation for that,” he says.

Why? Simple, he says: Economic fundamentals are all going in the other direction. Rental apartment vacancies are reaching record highs. Many segments of the housing market are still oversupplied. And the core demographic in the country—the baby boomers—are reaching the age where they’re more likely to downsize, buying less house in the years to come.

Far from some rosy estimates that housing is going through a temporary, once in a lifetime downturn, and that once the market bottoms, homes will again appreciate well beyond the rate of inflation, Mr. Baker argues that home prices are far more likely to increase annually at the rate of inflation, at best.

“If anything, I expect housing to be weaker than normal rather than stronger over the next decade,” he says. “People who say this is a temporary story, there’s no real reason to believe anything like that.”

The recent burst of good housing news has been fueled by government stimulus, including the tax credit, low mortgage rates and easy financing from the Federal Housing Administration. Mr. Baker, who had been a skeptic of the tax credit, concedes that it has worked. So, too, he says, has the FHA effectively supplied credit to goose sales.

But that’s likely for the worse, he argues, taking the opposite view of policymakers at the FHA.

“As a matter of policy I can’t see that we want people to buy a house in 2009 that’s 10-20% higher than it would sell for in 2011,” he says. “In so far as the FHA was encouraging people to buy homes in bubble markets that were not deflated, that’s not good for the FHA and you didn’t help the homeowner. We didn’t do those people a favor.”

We are not doing ourselves any favors as taxpayers who are guaranteeing the inevitable losses these loans will incur. When our current batch of knife catchers realize they overpaid and prices are not going to recover any time soon, they will strategically default.

Knife Catchers and the second wave of foreclosures

Today's featured property is an example of what Dean Baker is worried about: defaults and foreclosures among those who were encouraged by the government to overpay during the price decline.

I first profiled today's featured property back in September of 2007 in You Ugly:

This listing is the least desirable single family detached home in Irvine. Everything about this property is a negative:

It is 36 years old.

There is no back yard.

It only has 1 full bathroom.

The front elevation has no windows. It looks like a 3 car garage next to a 2 car garage. Nice…

The colors are awful. Check out the dark brown flooring and the blue cabinets and walls. The view of the block wall is a reminder of your prison sentence.

The living room has three incompatible shades of ugly.

The house itself is right on the 405 on ramp at Culver. A location guaranteed to have maximize noise and air pollution as people accelerate onto the freeway.

If that wasn't bad enough, it is adjacent to a huge power pole with enough electricity running through it to make your hair stand on end and give your children brain cancer. Perhaps the hum of the power lines drowns out the freeway noise. Who knows?

I would not live in this house.

The property was purchased on 2/28/2008 for $458,500. The owner used a $412,650 first mortgage and a $45,850 down payment. It appears he paid for less than one year before giving up:

Foreclosure Record

Recording Date: 02/11/2010

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

Foreclosure Record

Recording Date: 04/01/2009

Document Type: Notice of Default

The lender, HIGH TECH LENDING INC, danced for ten months before deciding to push this owner out.

Ideal Home Brokers and Financed Trustee Sales

Today's featured property, ugly as it is, will probably sell to a third party at auction. Thanks to 5% interest rates, recent comparable sales value the property at $500,500 — which surprises me that the owner is not trying to sell it an get his down payment back — but this property is headed to auction.

If a buyer steps forward and puts 3% down on a $485,485 purchase price, our hard-money capital partner will authorize us to go to auction and bid on the property. In the event we are the successful bidder, the property is automatically in escrow with the buyer who placed the down payment.

Personally, I can't recommend anyone pay $485,485 for this house, but based on the requirements of our hard money lender and the other costs in the deal, that is the price we must charge to make the deal work.

You'll love this great home in a wonderful school district. The light and bright floorplan features neutral carpet, pergo flooring and cathedral ceilings. The large yard provides lots of space for entertaining & play. This home is located just steps to the community pool and park. Plus, there are no Mello Roos! This is a bank owned property. Bring us an offer!

It is difficult to work the deal differently if the hard money lender is involved because they will want to be exclusively on title. I can’t pool your downpayment with their capital and share ownership even for a brief time.

Since these deals are approved individually, I could approach the hard money lender and see if they want to assume a lender position similar to an acquisition, development, construction (ADC) lender. They may be willing to extend a loan at 50% LTV to obtain the property, but what assurance do they have that you will obtain permanent financing to get them out of the deal? The interest rate would probably be onerous to force you to act.

As a rule, hard money lenders interested in these deals want to get their assured return, and they want a chance at the upside at auction. I haven’t approached any of them to act as pure lenders. Some may want that action. Banks should want that action, but the few bank representatives I spoke with said getting a ADC loan is nearly impossible in today’s lending environment, particularly for a deal like this.

What a weird decision to not put any windows in the front of the house. Other than that, it looks like a typical small ranch house, more common in places like Riverside than Irvine. Oh yeah, and the freeway. And power lines. However, if somebody’s choice is between this and a condo (with a high HOA fee), they may choose this.

In any case, this property is not currently for sale, so whether or not the property will be offered for sale for rental parity at auction or as an REO is currently unknown.

It isn’t for sale by the owner, but it will be for sale soon at auction. If a buyer steps forward and puts 3% down on a $485,485 purchase price, our hard-money capital partner will authorize us to go to auction and bid on the property. If we get it, the property is sold to the buyer who put up money for $485,485.

This is actually one of about six or seven different models in this old development – in other words, it’s not the only house in this neighborhood that looks like this. And there was a short sale offered on the same type house on the same street. Asking price was about $380,000. I think it still shows up as pending on the MLS.

Oh, and when I talked to an acquaintance familiar with Irvine real estate about that house, he told me that he knew one person who attempted to make a short sale offer, but that the seller was flooded with offers. However, it is still unsold, as far as I know.

I didn’t mean to say it wouldn’t be sold soon (it almost certainly will)-just whether or not the price will be at rental parity or not. The auction price could be $485,485 or any other arbitrary number (either higher or lower).

Momentum is powerfull psychological illusion, and emotions are poor guides. Both greed (bull market) and fear (bear market) turn many people into sheeps.

Acquisition price/time and sale price/time are important. Nothing else. However, prices may fluctuate widely. Sometimes you have to wait 10 years to complete what was 10 minute transaction. It takes a lot of patience and discipline to be investor.

He knows for a fact that shadow inventory will wipe out the solvency of the banking cartel. The banks are all on the brink of collapse, and the government will allow the carnage to teach us all a lesson on fiscal responsibility.

He also knows for a fact that interest rates are on the brink of sky rocketing sending the US into depression.

It’s not speculation when you know what is happening.

Buying based on rental parity would be foolish to put it politely. Assuming that the US may invoke Japanese style fiscal policy with 2-3% mortgage rates is beyond foolish. Prcincipal reductions and 2% mods are fantasy land.

Funny, I don’t get that impression from IrvineRenter. He never claims his views on shadow inventory or interest rates as fact, rather he presents a lot of references that support his views. I don’t blindly accept IR’s opinions as gospel; instead I look at the evidence he presents such as data, links to articles, etc.

Why are you so bitter? You sound like somebody who has a lot to lose if IR’s views are correct. If not, then why do you get so defensive all the time? If you have other views, I’m sure all the readers here would be interested in seeing the basis for your opinion (data, facts, articles, etc.) rather than having us believe something because “planet reality said so.”

Your habit putting words in my mouth is getting old. Creating straw-man arguments by making up statements I did not write makes you look foolish.

Your thoughts are becoming increasingly incoherent. This makes response difficult because I am never quite sure what point you are making — other than you are right and I am wrong.

I like opposing views, and I appreciate bullish commenters because otherwise we become an echo chamber. I would appreciate it even more if you present some logic or reason behind your statements rather than an emotional need for you to be right and me to be wrong. Projecting your wishful thinking is not presenting new information or a new perspective, and the only value it adds to the discussion is comic relief.

If the price of the ugliest (and most poorly-located) house in Irvine is up despite record Irvine foreclosures and short sales, what makes you think more of the same will produce a vastly different result?

Yummy,
if you would take some time to read this blog you would find a lot of reasons. But I guess the first rule of an RE agent is to talk, not to listen. BTW this is a listing price, no one will buy a POS like this one for this amount of money (well, a flipper might).

What I read in this blog is theories about more foreclosures. What I have. yet to see is evidence that foreclosures will lower prices. In the real world, this has not been the case for several years. But don’t let me rain on your charade. And speaking of reading, this house is not listed so there is no list price at all.

It’s not actually listed for that much; that’s what the current owner paid for it a little more than two years ago. So, somebody did, in fact, pay that much, and well after prices started falling. Also, the auto-comps seem to indicate that such a price is not completely unreasonable, although those might not take into full account into the uglyness, power lines, and freeway.

On the other hand, it’s a true SFR with a cheap HOA fee (fifty bucks a month) and no Mello Roos in the Irvine school district. Somebody might bite.

http://kiplinger.com/magazine/archives/should-you-buy-or-rent.html
Good indication that the OC is still in bubble land. Now Irvine does not equal the OC, but rents are falling in Irvine (I have been watching the rental market rather closely). I have the feeling that the current bear rally is driven by flippers and not by consumer demand, making it unsustainable (again). On a different note: Anyone planning to buy in Irvine should consider other nearby options such as Aliso Viejo and Laguna Niguel. Also safe, great school, even closer to the beaches and more supply.

Irvine school district drives local housing market probably more than any other single factor. One thing I have come to realize is the changing ethnic mix in Irvine and the increasing number of immigrant families in the area. As an immigrant myself and knowing many other people who came from the similar background I notice that many first generation immigrant families:

1. have extremely high propensity to save – habits carried over from the old culture and social environment. FGI’s rarely get infected with the social disease of conspicuous consumption. Saving rate among FGI’s tends to be much higher than general population (of course their descends will soon catch on to the mainstream culture and think a credit card is same as money)

2. focus heavily on their children’s education, this often means their willingness to pay a hefty premium on a house as long as it will get their kids into a top quality public school.

I am not saying that only immigrant families save more and pay big bucks for better education (or perceived better education), but % of immigrant families sharing these traits is IMHO much higher than general public. And this tendency will reinforce itself as better student source makes schools even better therefore attract more families with singular focus of their children’s education to move into the area. And they tend to be the ones who are capable of putting down large down payment in places like Irvine because of higher savings.

How do I know this? I don’t. It’s just a hunch. When my wife and I moved to OC a decade ago there was one Ranch 99 store in Irvine. Now we have two Ranch 99 stores within 5 miles to each other. In the same proximity two Korean supermarkets also opened in the last few years – H Mart and Zion. Retailers do their due diligence before they throw down multi-million $ investment. As far as I can see these stores clearly cater for first generation immigrants (their grown kids will likely shop in Ralph’s or Von’s just like everybody else).

And do not confuse immigrants with FCB’s (foreign cash buyers). Immigrants are an integral part of the local economy (holding a job, paying taxes, etc). FCB’s are foreign investors who seek to put their savings and other financial gains in their home countries to work overseas. Their buying in Irvine (or any places in the US) could serve multiple purposes – speculation on US RE for financial gain, store of wealth outside of their home country for fear of political instability and regulatory changes, or a place to live if they decide to send their offspring to Irvine to get some decent American education. Most likely you won’t be able to tell the difference (between an immigrant and an FCB) if you run into a family conversing among themselves in a foreign tongue at an open house, and chances are either one is capable of writing a check for a BIG down payment.

Planet, I appreciate almost every one of your posts, however, I haven’t picked up that IR is pushing any sales or any decision, and I tend to be pretty sensitive to getting played. I just don’t see IR with some secret agenda here other than to make some scratch here and there. Nothing wrong with that if everything is on the up and up.
Personally, I hope the whole system collapses like a house of cards and people have to live like they did in the depression. It would re-align people’s entitlements that’s for sure.

Thank you for your first hand story
about immigrant and FCB buying habits.
This is what I’ve been saying for
several months. The more success
oriented immigrants and foreign cash
buyers you have in an area, the less
likely you will see a dramatic drop in
housing prices, even with foreclosures.

But a neighborhood has to be desirable
to qualify as potentially price
stable. It doesn’t have to be heavily
immigrant, since having “old money” in
an area attracts “new money”.

I am a second generation American on
one side, and an umpteenth generation
American on the other side. I’m
probably going to buy real estate in
SoCal late next year because I have some
property out of state that I want to
do a 1031 on so I can manage it myself.
It is property from my family that I
acquired long enough ago that I have
a big capital gain that would be owed.

I wish property values would tank here
next year so I could use that out of
state property to acquire something
really nice, but I doubt that will
happen (or better still happen only in
the foreclosure-heavy SoCal market).
Even so, I’m leaning more towards a
condo near the beach rather than a big
house inland (not in Orange Co.).

“Buying into a declining market on speculation is a fools game. When I first studied stock trading, I noticed an important truth about picking tops and bottoms versus playing a trend; every attempt to pick a top or a bottom fails except the last one which is a big winner. Every attempt to trade momentum is a winner except the last one which is a big loser. It is better to hit many singles trading momentum than it is to try to hit home runs picking bottoms.”

IrvineRenter,
Best practical advice I seen for the stock market in years.

The house sold in 2008. If it is niw fully bank owned, how long was there free rent? Was it a nothing to near nothing down, so the owner got a good ROI? Your standard loan history appears to be missing.
If it is indeed a bank owned HOUSE (post auction or jingle mail), why is the full cash necessary when regular FHA financing should be available?

The picture seems to show 3 large frames for windows. Have they been stucco over or are the windows boarded up?

~Buy before your priced out of the market. ~The soothing background sounds will give you a peaceful nights sleep. ~Layman’s interpretation: constant sound of the freeway is much are conductive to sleep than stop and go traffic. :}

I took a huge dump on this house. I also took a huge dump on the HOA in this community, it is actually $75 a month, not $50 as stated.

Can anyone explain why the stupid HOA’s keep going up? I live in this community, they just jacked up the HOA from $187 to $224 per quarter, this is a community with many older people, and my older neighbors are mad as hell, we also got a nice notice with their jack up bill about all these stupid late fees starting after 10 days late, I really hope the older people with fixed income can pay or the stupid association can actually foreclose on their house after several months, (they set the fees and they also make the rules), a lot of these people bought their houses back in 1969 and only paid around $30K for them, now they are worth $500K to $800K, but these people cant sell to buy a cheaper place because their taxes would shoot through the roof, right now they only pay under $1000 a year for property taxes.

I pay just over $7000 a year for my property taxes because we are the stupid idiots that bought in 2007, this was before we knew about this blog and everything was honky dory. We also put a humongous downpayment, which means we cannot do a loan mod or negotiate with the bank at all.
If I get squeezed anymore you will read about me in the OC Register (I will be the deranged guy who lost it and got arrested for going to Santa Ana and taking a huge dump in front of the OC tax collectors office) of course, this would be after I took a huge dump in front of Bank of America, and stuck around to make sure the loan officer there stepped in it,,,with her new shoes.

More about stupid HOAs, the condo we lived in (woodbridge) had 2 associations, one was $80 and the other $250 per month, it went up every year, IS THIS FRAUD? Why does it only cost $100 a month for the same things the HOA does in other parts of the country? (and I remember those condos had much much more grass to cut), I understand people make more money in Irvine, but 2.5 times as much for cutting grass??? grass my ass, these HOA people should be hung upside down,,,by their balls….